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The High Cost of College Loans

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Slowing Down the Speeding Train of Educational Debt

By Rick Kahler MS CFP® ChFC CCIM

www.KahlerFinancial.com

Trying to improve on the free market system almost always ends badly. Take medical school or college tuition as an example. It’s an important segment of our economy, since for most a college education is a door to higher wages and a better lifestyle.

Tuition Due in Cash

In the days before college loans were as ubiquitous as mountain pine beetles in the Black Hills of SD, college costs were like any other service. They were due in cash. Students and their parents had to save money or pay tuition out of their earnings. Many students worked their way through college. Those whose parents didn’t save, who couldn’t or didn’t want to work, or who didn’t have high enough grades to get scholarships didn’t go to college.

Supply and Demand Basics

Since colleges competed for students, of course, schools had to keep a close watch on their tuition rates. Raising tuition too much resulted in fewer students. Fewer students meant falling revenues. The two forces of supply (college capacity) and demand (the ability to pay the tuition) kept college costs in check.

Political Fiat

Understandably, getting a loan to pay for college tuition was difficult. What sane bank or investor would make a loan to an unemployed teenager with no collateral to speak of? If you could find someone willing to make such a risky loan, the interest rate was more like the high rates charged by credit card companies.

Well-intended politicians decided it wasn’t fair that those who didn’t have the means to pay the tuition were denied college educations. They decided the solution would be to require the taxpayers to loan unemployed teenagers the money they needed to pay their tuition, sometimes at interest rates lower than what the most creditworthy could obtain.

Easy Money

With tuition money easy to obtain through loans, demand for a college education increased. With the increased demand came higher tuition costs. This easy money is the primary reason that college tuition costs have far outpaced inflation and gone up twice as fast as medical costs since 1985.

Unfortunately, one consequence of loaning money to someone the private sector deems a poor risk is that many of those borrowers will be unable to repay the debt. That’s why the private sector took a pass on making the loans in the first place. It should come as no surprise that 60% of all student loans are currently in default. According to The Kiplinger Letter, December 2, 2011, that default rate will only get worse, as the unemployment rate of those aged 20 to 24 is around 14%. Today, taxpayers are on the hook for over 70% of the $1 trillion in outstanding student loans.

Rising Appetites

And the appetite for loans continues to rise. This year we will add another $100 billion in college debt to the books. Today, the average student graduates with over $27,000 of debt owed to institutions or the government and another $7,000 owed to parents. It isn’t uncommon for a medical student to amass over $200,000 of student loan debt.

College Loan Debt

The more college loan debt that graduates take into the workplace, the less they have to spend for vehicles, rent, and consumer goods. The 60% who are in default on their debt will also mar their credit ratings, so their purchasing power will suffer for years to come.

Assessment

If taxpayers ever decide to quit footing the bill, many colleges’ tuition rates will fall. They may crash as hard as housing prices did in Florida, Arizona, and California. It will be a buyer’s market. But, that day could be years away. In the meantime, savvy students will do whatever they can to minimize their college tuition and graduate debt-free. 

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10 Responses

  1. Any Answers?

    Interesting article; some medical school debt metaphorical relevance.
    Now, possible solutions?

    Steven

    Like

  2. Best-kept secret in student loans

    Steve – Student debt has ballooned in recent years, as we know.

    http://money.msn.com/debt-management/best-kept-secret-in-student-loans-credit.aspx

    But, a federal program can cut loan repayments to as low as zero without triggering default.

    Kingston

    Like

  3. Kingston and Rick

    An essay on how cheap loans may hurt students.

    http://money.msn.com/debt-management/article.aspx?post=61c89148-def2-49aa-895c-d3d712f96f1b

    Emiel

    Like

  4. Five [5] graduate degrees that don’t pay off

    In today’s tough job market, many recent college graduates are enrolling in graduate programs to enhance their credentials and gain an edge with hiring managers. In some cases, the tactic may lead to lucrative job opportunities.

    A recent report from Georgetown University’s Center on Education and the Workforce found that a graduate degree can boost an individual’s earning power by more than 40 percent in some fields — but the true value can vary wildly from industry to industry.

    http://www.bankrate.com/finance/college-finance/graduate-degrees-dont-pay-off.aspx?ec_id=m1117367

    Emily

    Like

  5. Can bankruptcy solve student debt woes?

    Allowing Americans to wipe out some student debt by filing for bankruptcy will do little to help most families.

    http://money.msn.com/personal-finance/article.aspx?post=7f37b93e-4af6-4e53-ba09-f4d0045cb580

    Kingston

    Like

  6. The Home Equity Drag on Financial Aid

    Kingston; not so fast – For some colleges, home equity figures heavily in financial aid calculations. For others, not at all.

    You should know which is which before your kids apply.

    http://wealthmanagement.com/college-planning/home-equity-drag-financial-aid?NL=WM-10&Issue=WM-10_20120720_WM-10_485&YM_RID=marcinkoadvisors%40msn.com&YM_MID=1327475

    Emily

    Like

  7. Families Shoulder Heftier Burdens as College Debt Swells

    According to Marian Wang, student debt is putting a strain on students – and their parents.

    http://www.propublica.org/article/families-shoulder-heftier-burdens-as-college-debt-swells

    Meanwhile, federal programs to make student loans more affordable won’t bring relief to all.

    Adam

    Like

  8. Student loan forgiveness
    [What to know?]

    Worried about how much you’ll owe Uncle Sam after graduation?

    http://money.msn.com/debt-management/student-loan-forgiveness-what-to-know

    Loan forgiveness programs may help.

    Kitty
    http://www.amazon.com/Financial-Planning-Handbook-Physicians-Advisors/dp/0763745790/ref=sr_1_1?ie=UTF8&s=books&qid=1275315635&sr=1-1

    Like

  9. How to deal with student loans after death

    If a borrower dies with a balance on his or her student loan, it’s important for survivors to know how to proceed. In many — but not all — cases, the loan will be forgiven.

    http://money.msn.com/debt-management/article.aspx?post=9249c093-1a00-40c6-810d-f19398c864de

    Rick – A seldom discussed topic.

    Heather

    Like

  10. College Debt,

    “In spite of thinking of student loans as young persons’ debt, by 2014, two-thirds of all balances were owed by people over 30,” Andrew Haughwout, an economist and senior vice president, said at a recent presentation at the NY Fed.

    Kitty

    Like

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